Here's Why Personal Loan Borrowers Should Care About Inflation

Personal loans are often touted as an affordable means of borrowing. And this especially holds true for borrowers with excellent credit. Plus, personal loans allow you to borrow money for any purpose, whether it's a home renovation or a car repair. You can even take out a personal loan to start a business.

But personal loans are more expensive to sign these days than they've been in the past. And inflation is a big driver of that.

The connection between inflation and the cost of personal loans

Inflation has been rampant since mid-2021, and it's forced many consumers to do things like raid their savings and rack up balances on credit cards just to cover essential expenses. The Federal Reserve, meanwhile, has not taken inflation lightly.

Quite the contrary -- the central bank has raised interest rates 10 times since March 2022 in an effort to slow the pace of inflation and give consumers some much-needed relief. But while those rate hikes have, in fact, helped bring inflation down to a more moderate level, they've also made borrowing more expensive across the board.

These days, it's more expensive to sign an auto loan, home equity loan, and just about any type of loan -- including a personal loan. And if inflation persists, the Fed may need to raise interest rates again.

At its last meeting, the Fed actually paused rate hikes, noting the progress that's been made in fighting inflation. But the Fed also signaled that inflation is still higher than what the central bank wants.

In May, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods and services, was up 4% on an annual basis. That's a vast improvement from June 2022, when annual inflation, as measured by the CPI, came in at 9.1%.

But still, 4% inflation is not what the Federal Reserve wants. Rather, the Fed is committed to bringing inflation down to 2%. It's this level, the central bank feels, that's most conducive to economic stability. So while the Fed may have taken a break from rate hikes temporarily, it might very well resume that practice if the next CPI reading doesn't show more improvement.

And this is precisely why anyone looking to take out a personal loan should be paying attention to what's happening with inflation. Another rate hike could make a loan even more expensive.

Should you wait on a personal loan?

Since it's already more expensive to take out a personal loan now, you may want to wait to borrow money if you're not in an urgent situation. Say you want to finish your basement and borrow $30,000 to do it. If you're able to wait a year, you may find that it's less expensive to borrow at that point. So you'll need to weigh the inconvenience of waiting against potential savings.

Now if your need to borrow is more pressing, waiting may not be an option. But in that case, you may want to apply for a loan sooner rather than later -- before it potentially gets more expensive.